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AGNC Investment Corp (AGNC) Q2 2019 Earnings Call Transcript

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AGNC Investment Corp (NASDAQ: AGNC)
Q2 2019 Earnings Call
Jul 25, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the AGNC Investment Corp Second Quarter 2019 Shareholder Call. [Operator Instructions]

I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Katie Wisecarver -- Investor Relations

Thank you, Alison, and thank you all for joining AGNC Investment Corp second quarter 2019 earnings call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act.

Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factors section of AGNC's periodic reports filed with the Securities and Exchange Commission.

Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. An archive of this presentation will be available on our website and the telephone recording can be accessed through August 8, by dialing (877) 344-7529 or (412) 317-0088, and the conference ID number is 10132872.

To view the slide presentation, turn to our website, agnc.com, and click on the Q2 2019 earnings presentation link in the lower right corner. Select the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call. Participants on today's call include Gary Kain, Chief Executive Officer; Bernie Bell, Senior Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President; Aaron Pas, Senior Vice President; and Peter Federico, President and Chief Operating Officer.

With that, I'll turn the call over to Gary Kain.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Thanks, Katie. And thanks to all of you for your interest in AGNC. The rapidly changing interest rate environment was the key theme that dominated financial markets during the second quarter. In response to continued global economic weakness ongoing trade uncertainty and declining inflation expectations almost all major central bank signalled a willingness to lower short-term interest rates, and in some cases, potentially add further monetary policy accommodation through quantitative easing or other measures.

In response, the entire interest rate complex rallied significantly with the one to three-year part of the swap curve leading the way. Two-year swap rates dropped 57 basis points during the quarter, while 10-year swaps declined 45 basis points. The treasury curve underperformed the move in swaps but the yield on the two-year treasury still rallied 51 basis points while the 10-year fell 40 to just over 2%.

Risk assets performed reasonably well as expectations for central bank accommodation outweighed the weakness on the global growth front. During the second quarter, credit spreads tightened modestly and equities added to the gains achieved in Q1. Agency MBS spreads on the other hand widened as growing prepayment concerns and the inversion in the front end of the yield curve pushed premium -- risk premiums higher. The wider Agency MBS spreads drove the decline in our book value during the quarter and the negative 0.9% economic return. Additionally, our net spread and dollar roll income continued to face headwinds from elevated government repo rates relative to LIBOR.

As we look ahead, however, there is reason for optimism on a number of fronts. First and foremost, as Chris will discuss shortly, our portfolio is very well positioned to navigate today's elevated prepayment environment. Secondly, by significantly increasing our short-term swap hedges late in Q2, we were essentially able to lock-in most of the economic benefit we would have achieved from a 100 or more basis points in future fed rate cuts. Peter will expand on this shortly, but this action should minimize the earnings impact of the inverted curve over the next several quarters.

Lastly, while the underperformance of government and Agency repo has been a significant headwind for us over the last three quarters, our funding relative to LIBOR has begun to improve from late Q2 levels. And we are hopeful this momentum can be sustained during the second half of the year as the fed lowers rates and hence its balance sheet run off.

Furthermore, if we take a step back and look at the big picture, there is another reason to be optimistic. While a lower interest rate higher prepayment environment present some risks, it also provides us with a substantial opportunity to generate excess returns. This is especially true for an investor like AGNC with a proven track record managing the intricacies of asset selection and falling rate environments. To this point, although, future performance is uncertain, it is worth noting that our best returns have historically occurred in low rate faster prepayment environment.

Lastly, before I turn the call over to Bernie, I do want to quickly mention that our Board of Directors approved up to $1 billion in share repurchases. Our prior repurchase authority expired in December of 2017. Given the recent volatility in the stock, we decided to put the program back in place as a precautionary measure, so we are in a position to react if stock -- if share repurchases are accretive to stockholders.

At this point, I will ask Bernie to review our financial results for the second quarter.

Bernice Bell -- Senior Vice President and Chief Financial Officer

Thank you, Gary. Turning to Slide 4, we had a total comprehensive loss of $0.15 per share for the quarter. Net spread and dollar roll income excluding catch-up am was $0.49 per share or $0.03 lower than the first quarter, as continuing elevated repo funding cost and faster prepayment expectations adversely impacted our earnings. As I mentioned on our last call, our accounting yields are based on lifetime prepayment assumptions, which take into account forward interest rate expectations rather than actual CPRs for the quarter.

Given the decline in rates, our forward-looking CPRs increased to 12.4% as of the end of the second quarter from 10.5% last quarter and drove a $0.02 decline in our net spread and dollar roll income from the resulting increase in premium amortization expense. As Chris will discuss shortly, although, our actual CPR for the quarter was up, it remained well contained at 10% materially lower than prepayment speeds observed on generic higher coupon MBS due to the favorable prepayment characteristics of the majority of our holdings.

On the funding side, our repo cost was largely unchanged from the prior quarter. The higher-than-expected funding cost was somewhat offset by better carry on our swap position but still resulted in a $0.01 decline in net interest spread and dollar roll income.

Tangible net book value decreased 3.8% to $16.58 per share at the end of the quarter due to wider mortgage spreads, partly offset by the continued outperformance of our specified pool holdings. Including $0.50 of dividends declared per common share, we had a negative economic return of 0.9% for the second quarter. Thus far in July, our current estimate is that, our tangible net book value has improved 2% to 3%.

Moving to Slide 5, we operated with an average at-risk leverage ratio of 10 times our tangible net equity for the second quarter, up from 9.3 times for the prior quarter. We ended the second quarter at 9.8 times leverage.

With that, I'll turn the call over to Chris to discuss the Agency market.

Christopher J. Kuehl -- EVP of Agency Portfolio Investments

Thanks, Bernie. Let's turn to Slide 6, the second quarter was a volatile period for the rates markets. 10-year treasury yields initially traded higher hitting 2.6% in the second week of April only to then rally 60 basis points to end the quarter at 2%. Given the sharp move of lower run rates and growing prepayment concerns, Agency MBS underperformed both swap and treasury hedges during the quarter. Specified pools underperformed to a lesser degree with the weighted average pay up on our portfolio, increasing just over 0.625 during the second quarter. In contrast, as Gary mentioned, residential credit, high yield and investment-grade corporate debt performed well, benefiting from the abrupt shift in fed tone and market expectations for easier monetary policy.

Turning to Slide 7, you can see that the investment portfolio increased to $104 billion as of June 28. During the quarter, we continued to reposition the portfolio to optimize performance in today's faster prepayment environment. We sold approximately $8 billion relatively generic 30-year 4% and 4.5% pools in TBA versus adding predominantly lower coupon 30-year MBS. In the current rate environment, holding positions in TBA 30-year 4% and 4.5% MBS generates negligible income as evidenced by dollar roll price drops trading close to zero, given the combination of fast prepayment expectations and the inversion in the front end of the yield curve.

Turning to Slide 8, we have a table highlighting the importance of asset selection in the current environment. Here we provide a more detailed breakdown of our specified pool holdings by coupon with our most recent CPR compared with where lesser quality TBA deliverable pools are currently prepaying. In today's environment, 30-year 4%s and 4.5%s are clearly the biggest area of concern. And as you can see from the table, the vast majority of our higher coupon holdings are in pools with characteristics that significantly mitigate prepayment risk.

In the case of 30-year 4%s and 4.5%s, 79% and 91% of our holdings respectively are in high quality specified pools. Our goal with specified collateral is to protect the portfolio in areas that are most exposed to prepayment risks. With respect to lower coupons, the benefits of high quality specs are less compelling, and as prepayment differences, assuming overweigh the absolute worst pools are relatively small, roll financing is also more attractive in lower production coupons. In the months ahead, asset selection will be critical to strong performance and we view the current environment as an opportunity to take advantage of the substantial prepayment risk premiums that are priced into the market with the goal of translating them into excess returns as we've been able to do in past low rate environments.

I'll now turn the call over to Aaron to discuss the non-agency sector.

Aaron J. Pas -- Senior Vice President

Thanks, Chris. Please turn to Slide 9 and I'll provide a quick update on our credit investments. Our credit portfolio totaled $1.7 billion, roughly 4% of equity at the end of the second quarter, down marginally from the first quarter. The composition of our -- of the portfolio was largely constant that we did sell our remaining Jumbo 2.0 and reperforming loan backed AAA securities. Spreads for those two AAA sectors tightened meaningfully in Q2, despite increased convexity concerns related to the underlying cash flows .

Despite a move wider in credit spreads and risk assets in May, fed rate cut expectations lifted risk assets throughout the remainder of the quarter and generally closed the quarter at or near their tights. Mortgage rates fell further in Q2 and while we don't expect a continued decline to drive year-over-year home price appreciation back into the upper single digits. The decline will serve to ease some affordability issues and ultimately lead to a better backdrop for the housing market. As it relates to mortgage credit, the tightening in corporate credit and structured product spreads coupled with much lower mortgage rates resulted in a relatively favorable backdrop. Faster prepayment expectations on certain securities has materially reduced the amount of credit risk embedded in these cash flows through a reduction in expected defaults, providing a further tailwind to the improved macroenvironment. While CRT and other mortgage credit spreads are relatively tight at this point, they are understandably so.

Lastly, the tables at the bottom of the slide help illustrate the bias we have in residential mortgage credit toward that of lower-priced homes over Jumbo, that I mentioned on last quarter's call. As you can see, our CRT exposure is almost all below investment grade, and while we have made some investments in new issue securitizations backed by Jumbo and conforming loans, we generally had an up in credit bias.

With that, I'll turn the call over to Peter to discuss funding and risk management.

Peter Federico -- President and Chief Operating Officer

Thanks, Aaron. I'll start with the review of our financing activity on Slide 10. Our average repo funding cost in the second quarter was 2.62% down just 2 basis points from the prior quarter. This minimal decline is in sharp contrast to other short-term money market rates like three-month LIBOR, which experienced a much more significant decline. The elevated repo rates are a continuation of the pressure that showed up late last year and that has persisted now through the first two quarters of this year.

On Slide 11, we provide two graphs that highlight the divergence between our repo cost and other key interest rates. Unlike our repo funding, these other rates did repriced during the quarter to reflect the increased probability that the fed will soon begin to lower the federal funds rate. First, the graph on the left shows our average repo cost each day as compared to the rolling average three-month LIBOR rate. As we discussed last quarter, this relationship which turned negative earlier this year is an important driver of our aggregate cost of funds. This negative trend continued in the second quarter as evidenced by the divergence between these two lines with three-month LIBOR being about 15 basis points below our average repo rate at the end of the quarter. Also noteworthy on this graph is the repo line itself, which clearly shows the unusual tightness in the repo market and the corresponding rate spikes that have occurred over each month end.

Looking ahead, I expect our repo funding levels to improve further, as the Fed cuts rates and eventually ends its balance sheet run off. The graph on the right side of the slide shows the dramatic repricing that took place in the swap market over the quarter relative to our repo cost. The bar show our average repo cost followed by quarter-end swap rates across the curve. The two lines across the top show the swap curve at year-end and again at the end of the first quarter. As you can see, swap rates in the one to five-year range experienced the most dramatic repricing with a big piece of that move occurring in June, as the market aggressively reset to the new short-term rate outlook. As we show in the table at the bottom by quarter-end, two and three-year swap rates reflected at least three rate cuts. With the pay fixed rate on shorter-term swaps well below 2%, the carry profile on these swaps turned meaningfully positive in the second quarter and provided us the opportunity to lock-in more attractive funding levels. To take advantage of this opportunity, we significantly increased our position in one to three-year swaps during the quarter, because many of these swaps were added in June when the rates were at or near their lowest point, the benefit of these new swaps will not be fully reflected in our cost of funds until the third quarter. This benefit coupled with the improvement we expect in repo levels should put downward pressure on our cost of funds in the third quarter.

Slide 12 highlights these changes to our swap portfolio in greater detail. In aggregate, we increased our hedge portfolio to $88 billion and our hedge ratio to 91% of funding liabilities. The biggest change, as I mentioned, came in our swap book, which we increased to $75 billion and now cover 78% of our funding liabilities. The quarter-over-quarter increase was driven by the addition of about $30 billion of one to three-year swaps. Additionally, given the 5 to 10 basis point tightening in swap spreads across the curve, we opportunistically shifted a greater share of our hedges from short treasury positions to pay fixed swaps.

On Slide 13, we show our duration gap and duration gap sensitivity. Despite the significant rally in interest rates and the large increase in the notional value of our swap portfolio, our duration gap only shortened by about a quarter of the year. As essentially all of the incremental negative duration of the new swaps was offset by reductions in our intermediate and longer-term treasury and swap hedges. Today, our duration gap is again slightly positive as we continue to believe that mortgage spreads are biased to widen in a rally as prepayment concerns continue to rise. Against this backdrop, we believe a small long duration position is desirable from a risk management perspective. That said, with the aggregate duration of our asset portfolio now less than three years, we also added some incremental optional protection as we need to be mindful of the growing extension risk in our portfolio and in the mortgage market as a whole.

With that, I'll turn the call back over to Gary.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Thanks, Peter. And at this point, we'll open up the call to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today will come from Bose George of KBW.

Bose George -- KBW. -- Analyst

Hey guys, good morning. Actually first, just wanted to check on the spread on new investments now and I guess toward the end of the quarter, as you were sort of capturing the benefit of the lower swap rates?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Given obviously the shape of the curve and the fact that short rates are somewhat influx and obviously given the fact that prepayment variability is greater. I think there is more uncertainty, realistically around the investment spreads, it's hard to quote a specific number, so to speak. That said, I mean, I think there 90 basis points is still a reasonable kind of starting point for that. And obviously there's also the variability in LIBOR versus repo that plays into that.

Bose George -- KBW. -- Analyst

Okay. And then I mean to the extent that the Fed cuts 1 or whatever 2, 3 times. I guess given the positioning of your portfolio now does that change things in terms of your return or given how much you've swapped kind of I guess locked-in a lot of your returns?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Yeah, to your point we have locked-in a lot of that. Now, importantly, we didn't get any of or we got very, very little of that benefit in Q2, because we increased the swap portfolio very late in the quarter, and the compelling kind of driver there was the significant decline in shorter swap rates. So at this point, given our high swap hedge ratio, only like a quarter of that benefit in theory will factor and in terms of what the Fed actually does in a sense to your -- again, we were able to, in a sense, monetize the expectations for rate hikes. And so there is less variability for us in terms of what the Fed actually does, and importantly, exactly when they pull the trigger on eases. So we feel good about that and felt like that was an opportunity that we were supposed to take advantage of.

Bose George -- KBW. -- Analyst

Okay, thanks. And then actually just one on leverage, you leverage ticked up a little bit, mostly I guess on the mark-to-market. Can you just give us just updated thoughts on leverage where we could see that in the back half of the year and into next year?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Yeah, I think at this point, we've talked a lot about leverage over the last couple of years. I think our leverage at this point is kind of within the range that we would likely expect it to be over, let's say, over the next year, I mean, certainly it could tick up from here. I mean, I think we'd be very comfortable with leverage being in the 9.5 to 10.5 kind of region on an ongoing basis. And we'd be comfortable with it outside of that range for a short period of time. But I think at this point, most of the adjustment to leverage has been implemented so to speak.

Bose George -- KBW. -- Analyst

Okay, great. Thanks.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Thank you.

Operator

The next question will come from Douglas Harter of Credit Suisse. Please go ahead.

Douglas Harter -- Credit Suisse -- Analyst

Hi, Gary. On the last call you talked about being in a lower volatility environment and kind of a greater expectation of being able to achieve kind of your dividend yield as kind of an economic return. Obviously, the world has gone through a bit of a change or the environment has gone through a bit of a change in the last quarter. I was just wondering if you could update kind of on your thoughts around that comment and kind of the achievability of economic returns?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

So, very good question. And, clearly, as I said in my opening remarks, the mortgage market has priced in greater prepayment risk premiums. We have sort of a non-standard yield curve at this point, but the yield curve is also a temporary situation and that the curve is pricing in the expectation of relatively near-term Fed rate cuts. So I think that will -- I think the yield curve component of uncertainty, hopefully, will be -- a lot of that will be kind of rectified over the remainder of this year. And to the earlier question, I think we've been able to largely insulate our portfolio going forward from a fair amount of the uncertainty there. So that leaves the other kind of piece being the prepayment piece in terms of variability to our kind of true economic returns. And that's an area that we feel really good about. So what I have said last quarter was, I thought we were looking at a world where potential returns were lower, but the probability of kind of being able to achieve that was higher, where I mean if you look at our history, we seem to be entering a world where a lower rate faster prepayment environment, where if you look at our economic returns over 10-year history, those have been the periods of our best realized returns.

And so honestly, I do feel that the prepayment risk quotient clearly has gone up. I think that we're not quite sure how this -- how quickly the Fed will cut rates and to what extent. But I think what's really important and most important to not getting a negative surprise on the rates front, you see inflation outlook. And I think -- what I really think has solidified over the course of this year, more or so than a few rate cuts is that the global appreciation for the fact that inflation is not going to be a problem on the high side. I think it is so solidified that a significant up rate shock is highly unlikely. And that makes managing the portfolio much easier, not to say that we haven't put on some option hedges and we do need to be cognizant that rates can always go up, but I think practically speaking the inflation picture is very benign. So that leaves a question about lower rates and prepayments and that's just something we feel very comfortable dealing with. So big picture, yes, more volatility, but also we may be heading to an environment that historically has been very favorable for us.

Douglas Harter -- Credit Suisse -- Analyst

I guess just on that. Can you just talk about kind of how the portfolio has positioned from a risk perspective from either kind of a further decline in rates or kind of a surprise increase in rates and kind of the relative risk positioning of those two scenarios?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Sure. I mean if you look at -- if you look at Slide 13, it shows our duration gap sensitivity at the end of the quarter. As Peter mentioned, our duration gap's a little longer at this point even though rates really haven't changed that much. But realistically, there is variability in the duration gap. The other thing that we evaluate is what is likely to happen to spreads if we were to get a 50 basis point rally or if we were to get a 50 basis points sell-off. I think clearly the rally scenario of further decline would put pressure on mortgage spreads relative to a 50 basis point increase, which would take -- which would alleviate basically all of the prepayment uncertainty and get back to very comfortable rate levels.

So with that in mind, I think our mindset is to run with a small positive duration gap has some protection against a rally which is clearly still a material possibility. So big picture, our bias is to protect a little more against the downside. Also keep in mind that it also matters where your hedges are and not just the duration gap. And I think it's important as we just talked about both on the -- in our prepared remarks and answers to the prior questions, most of our negative duration now is coming in the very front end of the curve where -- what we've done is we've locked in kind of expectations for the Fed funds rate over the next couple of years. So if it turns out that the Fed cuts rates are little faster than that, we're likely going to end up with a steeper yield curve and that's also a favorable situation for us. So it's not just the duration gap. It's also a function of where are your hedges. And I think with our hedges being in the front end of the curve, then that reduces kind of risk in terms of -- in a big rally.

Douglas Harter -- Credit Suisse -- Analyst

Thanks, Gary.

Operator

And our next question will come from Trevor Cranston of JMP Securities. Please go ahead.

Trevor Cranston -- JMP Securities -- Analyst

Hey, thanks. I've got a follow-up related to the comments you just made, Gary, about the risk of rates going either down or up. I guess first you made the comment that if rates were to say increase 50 basis points or alleviate a lot of the prepaid concerns and presumably be a positive for spreads. I was wondering, if you could comment on how you think your spec pools specifically would perform in that type of environment given how far pay ups have increased? And then second part of the question would be, if we did get an incremental move down in rates, if you guys could maybe provide some color on how much incrementally of the mortgage market would be refinanceable if say rates rallied another 50 bps and if you think the magnitude of widening in that scenario would be similar to what we got this quarter or maybe a little bit less, given how far rates have already come down? Thanks.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Sure. Good questions. So first off, if we did get the -- if the 10-year backed up to the 2.5% area. Yes, specified pay ups will drop. Of course, we build in incremental duration for specified pools. But would they underperform TBAs in that scenario? Yes, they probably would. But it would be sort of -- it would be probably a little less of a reversal to what we have seen. In other words, I think they'd still be valued better than they were the last time we were at 250 because of both the scarcity of them and the kind of recent realization of how valuable they are in certain coupons. So I think that's the best way to think about that. I'll let Chris talk to you about the second part of your question.

Christopher J. Kuehl -- EVP of Agency Portfolio Investments

Hey, Trevor. So the only thing I'd add to what Gary said about spec pools is that, I think they'd be more risk in the up 50 scenario to the extent that they were really overvalued, while they've done well year-to-date, I'd say they're appropriately valued for the current environment. So the other thing I'd say is that lot of our specified pool positions are lower loan balance pools which get a lot of their convexity benefit from call protection, but they also generally have faster turnover as well. And so in the up rate scenarios that can help as well. But back to your question on just a percentage of the universe that's financeable today? With a 4% primary mortgage rate, it's about 30%, down 25% that number goes to about 40 -- call it mid 40s and then down 50, it's probably mid-60%s of the universe that would be exposed to a 50 basis point incentive to refinance.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

And then in terms of, I think the last part of your question was around what kind of widening could we expect in mortgages? And I think it's going to be very coupon dependent. But I think it's logical to assume something on the order of 10 to 15 basis points in something like a 50 basis point move. But it's going to depend on a lot of other factors, curve and other things. But again, it's going to be coupon specific. And so it's hard just to throw a number out there.

Trevor Cranston -- JMP Securities -- Analyst

Great. Okay, I appreciate the comment. Thank you.

Operator

The next question will come from Rick Shane of JPMorgan. Please go ahead.

Rick Shane -- JPMorgan -- Aanlyst

Hey guys, thanks for taking my questions. And looking at Peter slides on repo and LIBOR. It's clear and we've gone back and looked at this it's clear that there is some sort of beta or lag in those new low beta or some sort of lag in this movement. But when we look at the current trends, it does look like something structurally has shifted, do you think that we're just seeing a longer lag or do you think that there is behavior that's going on that's going to cause that spread to be more persistent?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Yeah, that's a great question. And I think you're right to an extent, and I think that's really the fundamental thing that's going on is why the Fed ultimately has changed its balance sheet run off, which is understanding now better today that essentially the entire system needs more reserves in it. And so it's ending its balance sheet run off to in a sense limit the drain of supply out of the system and it's making the system, I think, just tighter than it should otherwise be. So that's one of the sort of macro factors that I think the Fed now understands, and it's one of the reasons why, I think it is likely that the Fed will introduce some sort of repo facility between now and the end of the year to help address this sort of structural issue.

The other is that we have a lot of variability in treasury bill supply now that debt ceiling is another example of that where between now and the end of the year, we're likely going to have about $200 billion worth of treasury bill supply, which is going to put some incremental pressure on all of the money market rates and on repo level, so those are sort of the macro factors. That said, I do believe that this trend is not going to deteriorate further, and I do believe over the longer term, it is going to improve again. Give you an example, during the quarter, if you just looked at our three months where you could fund three-month repo each day versus the prevailing three-month LIBOR rate that relationship deteriorated by about 15 basis points. We started the quarter funding about 5 or 6 basis points through repo and ended the quarter at about 10 or so above repo. So there was about a 16 or 17 basis point deterioration and that shows up in that graph that I put on that page as well. But since quarter-end, we've seen about a 10 basis point improvement in it, and today for example, if we were to go out and borrow three-month repo, we would be doing so at around the three-month LIBOR level. So there is a lot of variability, there's a lot of big forces going on right now, but I do think we're trending in the right direction, but a lot can happen and it's going to be variable between now and the end of the year.

Rick Shane -- JPMorgan -- Aanlyst

Got it. That's very helpful. Thank you.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Sure. Good question.

Operator

And the next question will come from Jim Young with West Family Investments. Please go ahead.

Jim Young -- West Family Investments -- Analyst

Yeah, hi, Gary. Just a little bit more of a macro question, but when you look at the -- and think about the liquidity is being added into the overall system. You've got the Fed which is likely to cut rates next week and you've got the ECB with dragging on the tape this morning saying, they're going to continue to lower rates with them? My question overall is when you think about over the next couple of years what implications and ramifications does this have for the global economies for investments overall? And not just -- and I'm not just alluding to and referring to mortgage investments? Thank you.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Sure, and good question, I think we sometimes like just take each week or months new incremental news and just build it into kind of the overall picture. But I think it is important sometimes to take a step back and say what's going on? I think there are two things, one is that inflation expectations obviously have disappointed central bankers. And honestly despite the actions that are likely to be taken this year, I don't see that changing. I think we're in a different environment. And it -- globalization technology, there is a lot of factors that are going to make inflation really hard to come by. And If we couldn't generate inflation with very low unemployment and very accommodative monetary policy over the last five years. It's hard to see that happening over the next five. So I think what you're going to see is that we're in this very low rate environment for a while and central bankers are going to continue to be fighting what I think is a losing battle against inflation. And so what does that mean? I think first, what it means is that when you look at the asset prices in the U.S. they're going to continue to be supported. They're going to be supported, because there is nothing to buy outside of the U.S. especially it's obvious and obviously in the fixed income side is the most striking example of that. But when you think about some of the things like increased debt issuance in the United States, that's nothing compared to the lack of any positive returning safe instrument outside of the U.S. So I think again financial instruments are going to have sort of continued support like what they've seen in this quarter where the assumption is -- where central banks are supporting risk taking so to speak or almost forcing it. That said, we're in a long run -- we this expansion has gone on a long time and if you look outside of the U.S., it appears to be ending. And I don't think the central bank actions are going to change that. And I don't -- and I also don't think it's just a China trade deal if it were to happen, changes that. So I do think we are looking at a weaker economic environment at some point or I mean we've seen some weakness, but I think it gets much more noticeable maybe a year to two years from now, and unfortunately I think central banks are sort of out of ammunition. So when that occurs, I think what you'll notice is maybe not the severity of it early on, but maybe it's longevity, I think that might be the difference going forward. But hopefully that answers your question. I know it's a topic, we could talk about for a long time.

Jim Young -- West Family Investments -- Analyst

Thank you very much.

Operator

Our last question today will come from Matthew Howlett of Nomura. Please go ahead.

Matthew Howlett -- Nomura -- Analyst

Thanks for taking my questions. And those are lot of sort of moving parts with the NIM and looking just to 3Q. I mean you're going to get some benefit clearly on the funding side. I mean, I know you sort of model, you account for the prepayments a little bit differently than some of the others. Is there sort of any color you can give us in terms of the trend in margin in 3Q with everything -- all the moving parts?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

It's a very good question. We don't like generally to give forecast, but we've touched on some of the drivers, obviously prepayment speeds. We project prepayment speeds, so short-term prepayment outcomes aren't likely to be a big driver. On the other hand, interest rate movements can change our projected prepayment speed. So that's kind of that variable. On the funding side, we expect -- we're hopeful that we're turning the corner, I think we've talked about that. But most importantly, really comes from the other driver of cost of funds, which is the swap portfolio and the ability in a sense to lock-in significant positive carry there. And so that should be a tailwind in -- going forward that in the absence of something else kind of negatively impacting things that tailwind should help us.

Matthew Howlett -- Nomura -- Analyst

Got it. And then -- let me, I mean you sort of mentioned that you didn't want to get pinned down to the 90 basis points. But let me ask it -- let me ask you this what scenario could that spread go lower in terms of new investments, and maybe in other words, you think existing mortgages will widen if rates go down, I guess what's the scenario where that the spread even goes below 90 or goes a lot lower given unless the Fed's going to increase rates. I mean does the tenure goes to 150, is that going to jeopardize that investment spread or do you think we sort of bottomed out here at 90bps?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

I think a further rally in rates won't hurt that spread. As we've said, I think, mortgage spreads widened to the extent that the Fed's lowering interest rates would probably get rid of this inversion. So I don't think it occurs there. I think it's mortgage spreads tightening in -- with long rates sort of backing up a bit and prepayment fears sort of getting priced out of the market. I mean again just one of the things that one of the reasons why we have historically done well in lower rate faster prepayment environments is because, as a agency mortgage investor, we get paid to take prepayment risk, that's our biggest source of income in a sense. And so in an environment like today and in an environment where rates are continuing to fall the amount that we're going to get paid to take prepayment risk is going to continue to go up and as long as we make good decisions around what where we take that risk. Then our spread opportunities are probably larger. Again, I think going back to kind of the 250 everything flat world that we were looking at, as three to six months ago, that was an environment where we were in a low-spread environment and that's kind of, if we went back there and we did -- and we didn't see an improvement in the funding front, then you could see the sub 90 type spreads.

Matthew Howlett -- Nomura -- Analyst

So just last thing on -- just any quick comments on the single security to going live, I mean you've talked a lot about prepayments. Just any overall comments on that and the impact if any to AGNC?

Gary Kain -- Chief Executive Officer and Chief Investment Officer

I would say the single security really was largely a non-event. Now it's interesting when you talk to people you sometimes don't hear that because TBA quality has worsened over the course of the end of last year and the beginning of this year, but those things that happened already. The other kind of material issue that has impacted kind of the way dollar rolls have traded and -- the TBA performance, price performance is the fact that the Fed hasn't been buying mortgages, so that the tradable supply of kind of weak pools has been much greater than it was in prior rallies, so some people will logically, given the fact that this just happened a few months ago, will attribute some of those dynamics to the single security, big picture Freddie prepayments have been a little faster than Fannie's or a couple of little things to keep track of. But the bulk of what we've seen in the market was going to occur either way, and it was a function of these other factors, not the single security. So from our perspective, single security, our UMBS has not been a big picture factor and is unlikely to be going forward.

Matthew Howlett -- Nomura -- Analyst

Really appreciate the comments. Thank you.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Thank you.

Operator

We have now completed the question-and-answer session. I'd like to turn the call back over to Gary Kain for concluding remarks.

Gary Kain -- Chief Executive Officer and Chief Investment Officer

I'd like to thank everyone for their participation in our Q2 earnings call and we look forward to speaking to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Katie Wisecarver -- Investor Relations

Gary Kain -- Chief Executive Officer and Chief Investment Officer

Bernice Bell -- Senior Vice President and Chief Financial Officer

Christopher J. Kuehl -- EVP of Agency Portfolio Investments

Aaron J. Pas -- Senior Vice President

Peter Federico -- President and Chief Operating Officer

Bose George -- KBW. -- Analyst

Douglas Harter -- Credit Suisse -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Rick Shane -- JPMorgan -- Aanlyst

Jim Young -- West Family Investments -- Analyst

Matthew Howlett -- Nomura -- Analyst

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